GARY SHILLING: PROFITS WILL PLUMMET AND STOCKS WILL PLUNGE 43%

The S&P 500 just broke a five-day losing streak today, but
the index is still down from its highs.

Market bear Gary Shilling was on
Bloomberg TV today saying that with a hard landing in China
and a strong dollar, he expects the operating earnings of
S&P 500 companies to drop to $80 this year.

He said this would almost guarantee a major bear market with a PE
ratio low of about 10, which implies that the S&P 500
index should be around 800—a 43 percent decline from its recent
level.

"Bear in mind that the analysts have been cranking their numbers
down. They started it off at north of a 110, then 105, they're
now 102. They're moving in my direction.

But yeah I think that's true because as you just mentioned you've
got the foreign earnings that don't look good because of the
recession unfolding in Europe, a stronger dollar so there are
translation losses, hard landing in China and the U.S. I think we
could see a moderate recession led by consumer retrenchment, and
I think that kind of earnings estimate is not unreasonable."

Shilling said that while the U.S. is "the best of the bad lot",
it doesn't necessarily mean that people will rush into U.S.
stocks if things turn worse in Europe and China. He also said the
Fed has been driving stocks and that investors are ignoring other
crucial aspects of the economy like housing, consumer spending,
and profits.

Shilling said he is sticking with his "quartet"; i.e. he's long
treasuries, short stocks, short commodities and long the dollar.